Confused About What’s Happening With Istanbul Property? Here’s What To Expect In 2013

A year ago, I wrote about Turkey’s property market and how it was performing remarkably well – even at a time when things were still looking fairly gloomy elsewhere in Europe.

Since then, Europe is looking a little brighter, and Istanbul’s property market has moved out of its recovery phase and some way into an expansion phase.

This explains why we are still seeing healthy levels of price growth in the city as median prices have risen from $771.30 sqm to $942.6 sqm in 2012. We can thank the Turkish government in part for this. They kindly opened up the market for foreigners in 2012.

So far, so good…

Prices kept on climbing despite GDP slowdown, which was engineered, to some degree, again by the government. The rumours are they wanted to put the brakes on an overheating economy.

Even so, GDP still grew by more than 3% according to the latest forecasts.

So what can we expect to see happening in Istanbul in 2013?

It is too early to say with certainty, however in my humble opinion, one of the biggest factors this year will be the new 18% tax rate on properties of less than 150 sqm. Just to balance out the boost they gave to the property market last year, the government has now decided to even things up by slapping a tax on smaller properties. The sizes most investors are interested in.

A report by Gyoder says that construction has slowed due to uncertainty about VAT or KDV as it is called in Turkey. As I mentioned in a previous blog, if it does apply to the majority of properties in places where land values are high, there is a good chance that it will have a big impact on the Istanbul property market this year.

Prices could increase by 18% as a result of this alone and to be fair, the slowdown in construction can only be a good thing for investors nervous about oversupply.

However, according to our Istanbul expert on the ground, it may not be as simple as saying the tax increase will be on all properties less than 150 sqm. It is more likely to affect new developments in the centre of the city where competition for land has driven up prices.

Even then, it may not apply to central locations where there is a regeneration project. This explains the slowdown in construction as developers take a step back scratch their heads and try to figure out where they should build next.

The short-term affect of the tax increase is one thing, looking at the longer term in Istanbul, local affordability is likely to improve to a level where a typical family living in Istanbul will be able to afford the mortgage payments on properties.

This will be the tipping point where it becomes more attractive for local buyers to invest in affordable properties rather than rent. We have yet to reach this point in Istanbul, which is why rental yields are still among the best you will find anywhere in Europe.

There are, however, signs of a steady upward trend in affordability. As Istanbul’s population increases and this is a certainty when you consider that the population of the city has risen from three million to 15 million in the last 40 years, then we will inevitably see demand for property naturally increase to satisfy the youthful population.

Turkey’s Fitch rating improved to an investment grade in 2012 and this could end up making finance to buy property cheaper. The annual growth rate in housing loans increased by 11% in Turkey 2012 and even a modest lowering of interest rates could mean that typical families are able to buy rather than rent in some less expensive areas of Istanbul.

It is not a case of if but when incomes rise high enough in Turkey as the economy continues to grow.

There is no doubt in my view that we will see changes happening in the Istanbul property market in 2013. Key-ready apartments are likely to attract more attention from investors than buying off-plan as most investors hope to avoid the hike in tax passed on by developers.

Either way, there is nothing to suggest that the breaks are on yet or that we won’t be seeing more of the same combination of high capital growth and strong rental yields in Istanbul again this year. Just a little bit of uncertainty to keep things interesting.